Energy resources are complicated.
The systems used to categorise and understand them resemble futuristic Rubik’s cubes, three axis trying to capture the economic, geological and practical uncertainty associated with oil and gas production.
Given this complexity, and the difficulties in communicating it to a wide audience it is not unusual to see energy resource estimates surfacing in the popular debate with no mention of the underlying uncertainty.
Today the Department for Energy and Climate Change (DECC) are to release the latest estimates for UK shale gas resources. Like recent estimates provided by IGas and other operators in UK shale gas they are likely to show large volumes of shale gas in the UK. But what do these estimates really mean? To understand them you need to examine the way in which oil and gas reserves are classified and reported.
Like the over-used metaphorical onion, gas resource estimates have many layers. The whole onion represents the total volume of gas existing within the shale rock formation; the Gas in Place (GIP). This is the first thing calculated by geologists examining shale gas formations and this is the number DECC will likely present in their report.
To estimate this figure geologists consider a wide range of data to first estimate the size of the formation, then the proportion of that formation likely to produce gas, and finally the total volume of gas contained within it. This process involves a large number of different variables and is subject to significant uncertainty, particularly in regions like the UK where relatively few exploratory wells have been drilled.
But the physical, technical and economic difficulties associated with extracting gas from deep and relatively impermeable geological formations means that we will never be able to recover all of that gas. As we move down through the onion layers of resource classes the corresponding estimates of shale gas take into consideration more and more of these limiting factors.
First is the technically recoverable resource (TRR), which estimates the proportion of the whole onion that can be extracted using current techniques. Next is the economically recoverable proportion of gas, representing the gas recoverable given the current economic conditions including the varying costs of extraction and the estimated price of the gas on the market. The very centre of the onion, the proved reserves, represents the quantity of the gas in place that has the highest probability of reaching the surface and entering the gas market.
The evidence increasingly suggest that to make any useful estimates of the inner most layers of the shale gas resource increasingly relies on production experience, something UK shale gas has not yet enjoyed on any meaningful scale.
To explain the shale gas onion with an example, let’s look at a recent report written for the US Energy Information Administration (EIA), the numbers guys at the Department of Energy (DoE). For the UK the report presents a gas in place estimate of 623 Trillion cubic feet (Tcf). To put this number in perspective annual gas demand in the UK is approximately 3 Tcf. But as we know, this number is not useful if we are trying to work out the value of that gas as a commodity – something we might actually be able to use.
To get to the next layer of resource estimate (TRR) the report takes two steps. First it calculates an intermediate gas volume, which it calls the ‘risked’ gas in place. This number takes into account the uncertainty associated with the relative level of geological knowledge and production history for a given country’s shale gas projects.
Given the burgeoning nature of UK shale gas the report estimates that only 21% of the total can be considered in its risked estimate, or approximately 134 Tcf. The next step is to estimate the proportion of this risked amount that can be technically recovered (the TRR). The report estimates this at approximately 20%, giving a technically recoverable estimate of 25.7 Tcf – or a little less than 10 years of UK demand.
But even the methodology to derive this figure is less than ideal. In a better world geologists would be able to tighten up their estimates of gas in place through better geological knowledge, and calculate the technically recoverable shale by applying the experience of already producing wells within the same formation. However, this data do not yet exist. Until it does, methods like that applied in the EIA report are the best tools available.
25.7 Tcf is clearly still a large volume of gas when viewed against current UK demand, though it represents only 4% of the original GIP estimate. However, there are still several more layers of the onion to peel away before reaching the more conservative ‘proved’ estimate that lies at the centre.
This proved estimate is likely to be significantly less than the TRR, though how much less is unclear – it depends on economics. The current debate around shale gas is moving swiftly, and in some cases, faster than the scientific evidence. Care must be taken not to move too quickly where the evidence is absent. For now that evidence lies further down the well.